THE WELFARE STATE: PAST, PRESENT, AND FUTURE IN

TRANSATLANTIC PERSPECTIVE

Symposium at the GHI, February 2, 2004. Co-sponsored by the GHI and

the Hertie Foundation. Conveners: Christof Mauch (GHI) and Dirk
Schumann (GHI).
Participants: Kurt Biedenkopf (Chairman, Board of Trustees of the Hertie
School of Government and former Prime Minister of Saxony), Robert
Kuttner (co-editor, The American Prospect), Waltraud Schelkle (London
School of Economics), Martin Geyer (University of Munich).

Is the welfare state destined to disappear, given its huge and ever-
increasing costs? Or is it an essential instrument for the preserva-
tion of social stability? To many observers, it seems obvious that under
the pressure of aging populations, lagging economic growth, and the
challenges of globalization, the current welfare state cannot be sus-
tained without major transformations. Adopting a historical perspective
helps clarify the key functions of the welfare state, the sources of resis-
tance to change, and ways to overcome this resistance. With the generous
support of the Hertie Foundation, the GHI brought together a group of
prominent experts to discuss the development of the welfare state from
American and European points of view. Christof Mauch, director of the
GHI, was particularly pleased to welcome Kurt Biedenkopf, who has
made seminal contributions to this debate during a long and distin-
guished career that has combined scholarship with public service in a
unique way.
Biedenkopf began his remarks by describing the evolution of the
German welfare state since its beginnings in the late nineteenth century.
When Bismarck established the welfare system, it was meant to support
families caring for sick and retired family members, rather than to enable
individuals to maintain their standard of living during old age or illness.
Accordingly, pensions and other benefits were rather low. The Weimar
Republic explicitly defined the state as a welfare state, formalized the
participation of organized labor in its institutions, and extended its pro-
grams. While the Basic Law of 1949 placed the Federal Republic of Ger-
many in this tradition, chancellor Konrad Adenauer interpreted the social
responsibilities of the state as limited. By providing protection against
basic risks only, the state would prevent the necessary institutional ar-
rangements from endangering freedom. Following the passage of the
crucial legislation in 1957, not more than one-sixth of the Gross Domestic

GHI BULLETIN NO. 35 (FALL 2004) 119

Product (GDP) was spent on social expenditures. Biedenkopf pointed out
that in the 1970s, these expenditures expanded to eventually reach one-
third of the GDP. During this time, social expenditures increased much
more rapidly than individual incomes, thus dashing hopes that the
growth of the latter would reduce that of the former. As a consequence,
labor costs rose sharply, bringing about a sharp rise in capital invest-
ments that drove up productivity and eliminated most low-income jobs.
This resulted in rising unemployment and a concomitant rise of transfer
payments as well as an expansion of the shadow economy. All these
developments, Biedenkopf concluded, had produced an “overextension”
of the welfare state that was no longer affordable.
Biedenkopf identified three key challenges that made serious re-
form of the welfare state inevitable: demographic developments, the
changes of labor markets resulting from globalization, and the expan-
sion of the European Union. In his view, the first was the most important.
At present, the average German retires at age 60 with a life expectancy
of another 18 years, having spent only 37.5 years actively working.
Against the backdrop of a rapidly aging population all over Europe,
this ratio would before long fail to provide both a decent standard of
living and sufficient pensions for old age. While Germans are now be-
ginning to realize that a change of the system is necessary, Bieden-
kopf warned that overcoming the likely resistance would be difficult
and time consuming. In his view, however, there was no alternative to
restructuring the welfare state by returning responsibility to the indi-
vidual.
Robert Kuttner’s response took issue with the argument that the
present extent of the welfare state in Germany placed too heavy a burden
on its economy. After all, Daimler had bought Chrysler, and Germany
leads the United States in exports, not the other way around. Citing Karl
Polanyi’s The Great Transformation (New York, 1944), Kuttner argued that
failing to balance freedom and social security could cause severe social
and political crises. Dictatorships resulted from out-of-control capitalism,
not the excesses of the welfare state. By investing in areas not covered by
the market, that is in health and education, the state would make a
market economy viable in the first place. As Sweden’s introduction of
competition into the system demonstrated, however, experimentation
and reform were necessary. Kuttner emphasized that two types of risks
needed to be distinguished: voluntary risks, related to the opening of a
business, for example; and involuntary risks, such as the relocation of jobs
as a result of globalization. Agreeing with Biedenkopf that globalization
made it difficult to defend islands of high wages, Kuttner nevertheless
dismissed the idea that this necessitated the abolition of the welfare state.

120 GHI BULLETIN NO. 35 (FALL 2004)

While acknowledging that a reformed welfare state could not follow the
models set by Bismarck or the New Deal, Kuttner called for a “work-
and-welfare state” that allowed individuals to participate in the economy
without fear; otherwise, they might fall for political extremists. Unfortu-
nately, in his view the United States has seen an all-out assault on its
social security system since the 1980s.
In his reaction to Biedenkopf’s remarks, Martin Geyer noted that,
given the intensity and scope of the present public discourse on reforms
of the welfare state, Germany was finding itself in another Gründerkrise,
another attempt to rebuild the foundations of state and society. This
should come as no surprise, Geyer emphasized, as the institutionalization
of social interests over a long period of time had empowered many social
groups and thus had helped to integrate Germany. But it had also created
the potential for stiff resistance to reforms of the social security system.
While farmers were often forgotten in discussions about the system, the
reactions of civil servants had to be seen as a yardstick for the viability of
changes. In contrast to Biedenkopf, Geyer described the 1980s, not the
1970s, as a crucial period. By providing new benefits for families, the Kohl
government had increased the stakes families held in the system and
made the welfare state even more resistant to reforms, in spite of attempts
to cut it back elsewhere. Geyer found it puzzling that politicians in par-
ticular were voicing their disillusionment about the ability of the political
process to change the social security system. Calling for more optimism,
he interpreted the modification of the pension system that was associated
with former labor minister Walter Riester as an example of successful
piecemeal reform. Muddling through, Geyer concluded, might be a vi-
able reform course for Germany, as it had been for the United States
during the last two hundred years.
In the lively discussion that followed, it soon became clear that
Biedenkopf’s and Kuttner’s positions were not as far apart as they had
first appeared. Prompted by questions about the impact of German uni-
fication on the social security system, gender inequalities, the meaning of
Hayek’s theories, and the differences between the reform discourses in
the United States and Germany, Biedenkopf made it clear that he did not
advocate dismantling the welfare state, but instead favored adjusting it in
such a fashion that the coming generation would be dissuaded from
opting out of the system. Defining education as an investment in the
future, Biedenkopf refused to categorize it as part of the social security
system. While opting for a broader definition that encompassed educa-
tion, Kuttner acknowledged that Biedenkopf’s positions would place him
to the left of the American discourse. Both agreed that globalization called
for mechanisms of political control to avoid excessive emphasis on eco-
nomic freedom in relation to social responsibility. Referring to the Euro-

GHI BULLETIN NO. 35 (FALL 2004) 121

pean Union, however, Biedenkopf pointed out that the nation-state had
ceased to be the only institution capable of exerting this control. All in all,
the presentations and the discussion shed new light on the enormous
complexity of the debate about reforms of the welfare state on both sides
of the Atlantic. Europeans and Americans seem not so much separated by
different systems as they are close to each other in the problems of com-
ing up with precise definitions and viable political strategies.

Dirk Schumann

122 GHI BULLETIN NO. 35 (FALL 2004)